YouTube Recasts for New Viewers

Google Plans to Organize Site Around 'Channels,' Fund Original Content as TV and Web Converge

Google's YouTube video website is working on a major site overhaul to organize its content around "channels" as it positions itself for the rise of Internet-connected televisions. Jessica Vascellaro has details.

By

Jessica E. Vascellaro,

Amir Efrati and

Ethan Smith

Updated April 7, 2011 12:01 a.m. ET

Google Inc. is working on a major overhaul of YouTube as it tries to position itself for the rise of televisions that let people watch online video in their living rooms, according to people familiar with the matter.

YouTube is looking to compete with broadcast and cable television, some of these people said, a goal that requires it to entice users to stay on the website longer, and to convince advertisers that it will reach desirable consumers.

The site is planning a series of changes to its home page to highlight sets of "channels" around topics such as arts and sports. About 20 or so of those channels will feature several hours of professionally produced original programming a week, some of these people said. Additional channels would be assembled from content already on the site.

It is planning to spend as much as $100 million to commission low-cost content designed exclusively for the Web, people familiar with the matter said.

The pending changes are a big bet by the world's most-popular video site to push in a new direction. Between the Wild West of user-generated content and the pricier precincts of full-blown TV shows, Google is hoping to carve out a niche of original, professionally produced Web videos that it hopes will cultivate loyal viewers.

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A YouTube spokesman declined to comment on the new initiatives. "YouTube saw incredible growth in 2010 and we're excited about the future," the spokesman said.

YouTube's move comes as streaming video services are growing stronger, upending the way people watch TV shows. Netflix Inc.NFLX2.47% is building up a cache of TV content and movies, recently securing rights to stream the hit series "Mad Men." Amazon.com Inc.AMZN-0.11% and Hulu LLC are making a similar grab. Hulu's investors include Wall Street Journal owner News Corp.

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The moves are pressuring cable and satellite companies, which are developing and acquiring new services to compete. On Wednesday, satellite operator Dish Network Corp.DISH-0.57% said it won a bankruptcy auction for Blockbuster Inc., which has a streaming movie business.

The efforts represent a new phase for YouTube, which years ago gained dominance with a site designed to drive traffic to individual videos and to help those clips go viral. It had little contact with content owners and focused on maximizing traffic to whatever was popular, whether it was silly or serious, revenue-generating or not.

After Google bought the site for $1.6 billion in 2006 and eventually faced pressure to turn it into a profit center, YouTube went on the hunt for feature content, like TV and movies, expecting such content would make it easier to sell ads.

But that effort has been slow going as Google has so far remained unwilling to pay licensing fees on the same scale as Netflix and others.

From the beginning, YouTube also featured plenty of professional entertainment content, but it was often posted without the owners' consent. The site eventually implemented a filtering system in response to complaints from content owners.

Now, it is pursuing a middle way, investing in programming rather than spending huge sums to license it. It is aiming to create a network of ad-supported channels that users tune into and spend more time with. YouTube executives say they want people to "watch YouTube" the same way they "watch TV."

YouTube's changes are expected to be phased in over time, starting before the end of this year, people familiar with the matter said. The site is currently hiring people to help with the initiatives, these people said.

YouTube is still in the process of designing the channels and in recent weeks held meetings with Hollywood talent agencies such as Creative Artists Agency, William Morris Endeavor and International Creative Management to discuss the possibility of their clients creating YouTube channels, people familiar with the matter said. Several news publications previously reported on talks with talent agencies.

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The talks are more likely to yield deals with production companies or directors than with individual movie stars or other celebrities, said the people familiar with the matter. Some of the channels may contain content hand-picked by certain "tastemakers" who could attract a following.

In addition to increasing the average time a YouTube user spends on the site, which stands at about 15 minutes a day, the moves are aimed at attracting new ad dollars, including a chunk from the $70 billion U.S. television-ad market, said people familiar with the matter.

YouTube is now the world's No. 3 website in terms of unique monthly visitors and last year generated about $544 million in net revenue, or the site's take after payouts to content creators with which it shares ad revenue, according to estimates from Citigroup analyst Mark Mahaney.

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YouTube executives have said the site is close to being profitable.

The site is expected to generate more than $800 million in net revenue this year, according to Citigroup estimates. Revenue is growing on both user-generated content and popular made-for-Web shows such as the teen-oriented "Fred." YouTube contributors can already upload their content to channels, but some argue they are difficult to find on the current site.

Meanwhile, the site has lagged some competitors in acquiring longer-form content. Last fall, YouTube entered negotiations to license Miramax's library of 700 films, people familiar with the matter said. Under the terms being discussed, YouTube would have paid roughly $100 million for the movies—on par with what Netflix recently paid for the same library, these people said.

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The deal hasn't closed. That appears to reflect what one person described as YouTube's desire to make its offerings more akin to a set of ad-supported TV channels than subscription-based channels like Time Warner Inc.TWX-0.45%'s HBO.

YouTube is still pushing for deals to get more well-known TV shows and movies onto the site, said a person familiar with the matter.

YouTube offers some full-length recent and older hit movies and shows, such as "The Da Vinci Code" and "Married...With Children," though the selection is limited.

YouTube's channels effort will dovetail with the introduction of new social-networking features that, among other things, will provide new ways for users to identify video content that is popular among their circle of friends, said people familiar with the matter.

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